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IRAs have been helping American workers and their families save for retirement for more than 40 years, so you probably have one or two. But are you taking full advantage of an IRA’s benefits?

Chances are there may be a few things that you don’t know about an IRA, so, let’s take a look at eight commonly overlooked IRA rules and features that may be available to you, your spouse, or even your children.

1. You can open a Roth IRA for a child who has taxable earned income.1

Helping a young person fund an IRA—especially a Roth IRA—can be a great way to give him or her head start on saving for retirement. That’s because the longer the timeline, the greater the benefit of tax-free earnings. Although it might be nearly impossible to talk a teenager with income from mowing lawns or babysitting into salting away part of that income for a retirement account, gifting the contribution to an IRA on behalf of a child or grandchild can be the answer. The contribution can’t exceed the amount the child actually earns, and even if you hit the maximum annual contribution amount of $5,500, that’s still well below the annual gift tax exemption ($14,000 per person in 2016).

The Fidelity Roth IRA for Kids, specifically for minors, is managed by an adult until the child reaches the appropriate age for the account to be transferred into a regular Roth IRA in their name. This age varies by state. Bear in mind that once the account has been transferred, the account’s new owner would be able to withdraw assets from it whenever he or she wished, so be sure to educate your child about the benefits of allowing it to grow over time and about the rules that govern Roth IRAs.

2. Even if you exceed the income threshold, you might still be able to have a Roth IRA.

Roth IRAs can be a great way to achieve tax diversification in retirement. Distributions of contributions are available any time without tax or penalty, all qualified withdrawals are tax free, and you don’t have to start taking minimum required distributions at age 70½.2 But some taxpayers make the mistake of thinking that a Roth IRA isn’t available to them if they exceed the income thresholds.3 In reality, you can still establish a Roth IRA by converting a traditional IRA, regardless of your income level.

If you don’t have a traditional IRA you’re still not out of luck. You could open a traditional IRA and make nondeductible contributions, which aren’t restricted by income, then convert those assets to a Roth IRA. If you have no other traditional IRA assets, the only tax you’ll owe is on the account earnings between the time of the contribution and the conversion. However, if you do have deductible contributions in another IRA, you’ll need to pay close attention to the tax consequences. That’s because of an IRS rule that calculates your tax liability based on all your traditional IRA assets, not just the after-tax contributions in a nondeductible IRA that you set up specifically to convert to a Roth. For simplicity, just think of all IRAs in your name (other than inherited IRAs) as being a single account. For more information, read “Answers to common Roth conversion questions” in Viewpoints.

3. A nonworking spouse can open and contribute to an IRA.

The IRA was created initially to help workers save for retirement, but a nonworking spouse can have one too. Non-wage-earning spouses can open and contribute to their own traditional or Roth IRA, provided the other spouse is working and the couple files a joint federal income tax return. This is usually referred to as a Spousal IRA. For 2016, a nonworking spouse can contribute as much to an IRA as the wage earner in the family.

4. Alimony counts as earned income.

Although former spouses receiving alimony might not like having to pay tax on these payments, the fact that alimony counts as earned income may qualify them to contribute to an IRA. Keep in mind, however, that tax-deductible contributions to an IRA can’t exceed total taxable earned income. So if the total of your alimony payments and other taxable earned income is less than $5,500 ($6,500 if you’re 50 or older), your deductible IRA contribution will limited to the lower amount.

5. Even if you don’t qualify for tax-deductible contributions, you can still have an IRA.

If you’re covered by a retirement savings plan at work—like a 401(k) or 403(b)—and your 2016 modified adjusted gross income (MAGI) exceeds certain income limits, your contribution might not be tax deductible.4 But receiving a current-year tax deduction isn’t the only benefit of having an IRA. Taxpayers who exceed the IRA income limits for tax-deductible contributions can still make nondeductible contributions, which offer tax-deferral on potential account earnings until the time of withdrawal. You also have the option of converting to a Roth IRA (see No. 2, above).

Although making a nondeductible traditional IRA contribution has tax advantages, you should first consider maximizing your contributions to a 401(k) or similar workplace retirement plan. A 401(k) has a higher contribution limit, and your contributions can be excluded from your income regardless of how much you earn.

6. You have until April 15 to make an IRA contribution, but why wait?

One of the quirks of IRA regulations is that taxpayers have 15½ months to make a contribution for a given tax year. That gives you through mid April to contribute to a traditional IRA for the previous calendar year and take the deduction (if you qualify) on your tax return. That’s a nice option to have if you’re looking for a last-minute deduction and the window on other qualified retirement plan contributions has already closed. The same 15½-month rule applies for contributions to Roth IRAs. But in either case, the longer you wait, the less time you’re giving your money to possibly begin accumulating tax-deferred earnings. For ideas on how to invest your IRA contributions, read Viewpoints “Make your IRA contribution—and invest it too”.

7. Setting up automatic contributions is an easy way to grow your IRA.

If you’re in the habit of waiting until the tax-filing deadline to think about lowering your tax bill with an IRA contribution, why not set up automatic monthly contributions? An auto contribution plan offers many advantages: it’s easy, it avoids the scramble to come up with the money for a lump-sum contribution, and it puts your money to work for you sooner. If you set up automatic IRA contributions, regular monthly contributions also allow you to purchase investments within your account at different prices throughout the year.

8. "Catch Up" contributions can help those age 50 or older save more.

This last point is pretty straightforward for those with sufficient taxable earned income. If you are age 50 or older, you can save an additional $1,000 in any of your IRAs each year. This is a great way to make up for any lost savings periods and make sure that you are saving the maximum amount allowable for your retirement.

1. In general, anything that can be legitimately reported as taxable income on a form W-2 is acceptable (although the fact that the income is taxable doesn’t necessarily mean that taxes are paid—the amount could be below the child’s exemption). So money a child earns on a paper route is OK, but money given to her by her parents as an allowance probably isn’t. Money earned by a child employed in a family business may be acceptable, but documentation will be required and the amounts must be reasonable—you wouldn’t be able to claim to have paid your 10-year-old $300 for one hour of sealing envelopes. Always consult with a tax expert when in doubt.
2. A distribution from a Roth IRA is tax free and penalty free, provided that the five-year aging requirement has been satisfied and at least one of the following conditions is met: you reach age 59½, become disabled, make a qualified first-time home purchase ($10,000 lifetime limit), or die. Minimum required distributions do not apply to the original account owner, although heirs will be subject to them.
3. If you’re single, or file as head of household, the ability to contribute to a Roth begins to phase out at MAGI of $116,000 and is completely phased out at $131,000. If you’re married filing jointly, the phase-out range is $183,000 to $193,000.
4. If neither you nor your spouse (if you have one) is covered by a workplace plan, there are no income limits on income for deductible contributions to a traditional IRA. For those who are covered by a workplace plan, the tax deduction for traditional IRA contributions begins to phase out at $98,000 of MAGI for married couples filing jointly and is eliminated at $118,000. The phase-out range for single taxpayers is $61,000 to $71,000. If you’re not covered by a workplace plan but your spouse is, the phase-out range is $183,000 to $193,000.
Fidelity does not provide legal or tax advice. The information herein is general and educational in nature and should not be considered legal or tax advice. Tax laws and regulations are complex and subject to change, which can materially impact investment results. Fidelity cannot guarantee that the information herein is accurate, complete, or timely. Fidelity makes no warranties with regard to such information or results obtained by its use, and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation.
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